Market Makers

Who are Market Makers?

They are appointed by stock exchanges like The New York Stock Exchange (NYSE) and American Stock Exchange (AMEX), NASDAQ Stock Exchange and London Stock Exchange (LSE) to continuously provide ask and bid rates for the brokers to buy and sell the stock in these exchanges.

Their quotations are publicly displayed on the trading terminals. They are both ready to buy the stock at the ask price and sell the same stock at the bid price, providing liquidity to the market. In other words they make the market.

Earlier 'specialists' and 'jobbers' were providing the needed liquidity in the market. There are thousands of market makers with at least two for a particular stock.

How do they make money?

Stock market makers make money by pocketing the ask and bid difference. They make money both in rising market and falling market, as well as side way market.

Though the difference is very small, since the volume generated is very high and they need not pay the brokerage as we do, they make considerable amount of profit

They are also compensated by the stock exchanges for each share that is sold to or purchased from each posted bid or offer. Conversely, a trader who place a market order on electronic communication networks (ECN) and sells at the ask price and buys at the bid price is charged a fee for using this liquidity.

Since the market liquidity makers also compete with each other and other traders, the ask and bid difference narrows, there by increasing the market efficiency and the depth.

All of them are big firms acting on behalf of the exchanges. But some day traders act as market's unauthorized markers by placing limit orders and buying only at ask rate and selling only at bid rate.

They trade in illiquid counters so that the ask bid difference is considerably wider to cover the brokerage and still make money.





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